For much of the last two years, social media stocks have trended in the same direction.
Companies like Facebook parent Meta Platforms (META 2.48%), Snap (SNAP 2.09%), Pinterest, and Twitter are all subject to the same general influences, especially during the pandemic. During the lockdown period, for example, usage spiked, but advertising plunged. Then, social-media ad spending came roaring back as e-commerce companies and others looked to grab business at a time when consumers were flushed with stimulus payments.
More recently, social media companies have faced headwinds from supply chain challenges and cost inflation, which have weighed on ad spending.
However, something surprising happened on Friday. Snap shares rocketed more than 50% higher after the company turned in its fourth-quarter earnings report. Including the Thursday slide, shares were up about 16%.
While Facebook complained of competition from TikTok and Apple's ad-tracking restrictions, Snap cruised ahead with 20% daily active user growth and 42% revenue growth. Keep reading for three reasons Snap is executing in a difficult social media environment.
1. Snapchat is TikTok-proof
TikTok has been the biggest insurgent in social media over the last few years, surpassing 1 billion monthly active users last September. That growth has come at the expense of other social media platforms, and companies from Facebook to Netflix have made multiple references to TikTok's competition for eyeballs. Facebook introduced its own TikTok copycat, Reels, and said on its recent earnings call that it would accelerate its rollout.
More than any major social network, Snapchat has continued to grow even while TikTok has been ascendant. Snapchat's daily active user base rose 20% to 319 million, and it grew in all three of its regions, broken down as North America, Europe, and Rest of the World.
On the earnings call, CEO Evan Spiegel was asked about competition from TikTok, and said that the company has differentiated itself from platforms like TikTok, Instagram, and YouTube with products like Snap Map and augmented-reality (AR) tools like Lenses, which have generated strong engagement.
Piper Sandler's survey of American teenagers also shows how Snapchat has held its own against TikTok. In its most recent survey last fall, 35% of U.S. teens said Snapchat was their favorite social media app, ahead of TikTok at 30% and Instagram at 22%. That's important because teens and Gen Zers are a key market for Snapchat.
2. It keeps innovating
Snap is arguably more creative than any other social media company. It invented Stories, the rotating posting medium that was copied by almost every one of its competitors. It's also moved well beyond its origins as a disappearing messaging platform to be a more-comprehensive entertainment company, curating content and highlighting the top Snaps through Spotlight.
It pioneered Maps to give users a creative way to keep in touch, and has invested aggressively in AR Lenses, which have been a hit both with users and advertisers, which see it as a unique way to reach a younger audience. For example, it just introduced an AR try-on shopping interface for users in the fourth quarter.
Snap also defines itself differently than most other social media companies. Unlike Facebook, whose mission has long been to connect people, Snap calls itself a camera company, explaining, "We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate." That focus on the camera and on technologies like AR puts it ahead of the market, giving it a head start at a time when so many tech companies see the metaverse as the next big connectivity platform.
3. The business is scaling nicely
Snap just reported its first-ever quarter of profitability on the basis of generally accepted accounting principles (GAAP), as well as its first full year of positive operating cash flow and free cash flow. The bottom line is finally starting to respond after years of strong top-line growth.
The company was able to get out of the red because its biggest expense line item, cost of revenue, rose just 16% in the fourth quarter to $449 million. Cost of revenue mainly reflects tech infrastructure costs for things like storage and computing, and the company has made efforts to rein in these expenses and reduce infrastructure costs per user, which fell from $0.69 to $0.66.
Since revenue per user continues to move higher as its ad products get better, the company's profitability should rapidly improve. That also gives Snap more money to spend on things like research and development (R&D) and marketing that will drive growth.
Peers like Pinterest have seen a boom in profitability over the last two years, and digital advertising giants like Meta and Alphabet regularly post operating margins of 30% or better.
In other words, the bar for profitability in social media is high. While Snap might never reach 30% operating margins, investors have to be encouraged by the improvements on the bottom line.